Did student debt collector Navient swindle its borrowers?

The Consumer Financial Protection Bureau (CFPB) and two state attorney generals filed lawsuits against the country's largest student loan servicer Navient Wednesday, claiming it misled its borrowers in order to maximize profits.

To cut logistical costs and boost revenue, the education loan management company steered borrowers away from repayment plans that would have been more appropriate to their circumstances, the lawsuit alleges. The case, based upon three years of investigation, resonates with the experience of many student-loan borrowers and highlights the need for greater regulatory oversight, say observers.

“I’d say that the problems that were highlighted in this suit mirror the experiences that borrowers that I work with and stories that I hear from advocates in the field,” Persis Yu, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center tells The Christian Science Monitor. “We have been … pushing servicers and the Department of Education to deal with the fact that people have been in forbearance for years."

Citing Navient’s allegedly illegal practices and its alleged violations of “trust that borrowers placed in the company,” the lawsuit charges the company with a variety of misdeeds, including misrepresentation in cosigns and failing to enroll borrowers in affordable repayment plans.

"For years, Navient failed consumers who counted on the company to help give them a fair chance to pay back their student loans," CFPB Director Richard Cordray said in a statement. "At every stage of repayment, Navient chose to shortcut and deceive consumers to save on operating costs. Too many borrowers paid more for their loans because Navient illegally cheated them and today's action seeks to hold them accountable."

In one example, the agency accused Navient of mishandling the student loans for those with “total and permanent disability,” including veterans who are unemployable because of injuries from their military service. According to the Department of Education, their federal loans should be discharged without impacting their credit reporting.

Yet, Navient allegedly failed to follow the instructions and, according to the suit, mistakenly reported thousands of disabled borrowers’ charged-off loans as defaults, marring their credit reports that could potentially prevent them from obtaining mortgages and other loans.

Navient denies all wrongdoing, calling them “agenda-driven ultimatums.”

“The allegations of the Consumer Financial Protection Bureau are unfounded, and the timing of this lawsuit – midnight action filed on the eve of a new administration – reflects their political motivations,” the company said in a statement.

Navient, a debt collector for both federal and private student loans, provides services ranging from processing monthly payments to helping borrowers enroll in repayment plans. Though not a lender itself, the company has more than 12 million customers, more than six million of whom come from its federal contract with the US Department of Education, and handles more than $300 billion in loans.

The company, which split in 2013 from Sallie Mae, paid $90 million in settlement in 2014 for imposing interest rates above six percent for military members. Navient spent 66 percent of its political donations on Republican candidates during the 2015-2016 election year, according to a report from the Federal Election Commission.

The CFPB for its part, had a structure that was ruled “unconstitutional” by a federal appeals court in October, and it has long been the target of criticism by Republican lawmakers, who want to constrain the agency and who have called for the president-elect to replace Mr. Cordray, The Christian Science Monitor reports.

Student loan debt in the United States reached record highs in 2016, with an average of $30,100 per borrower, according to a report by the The Institute for College Access & Success. The record rates of borrowing and indebtedness became a prominent issue in the presidential race, with all major candidates offering plans for reform.  

Navient’s alleged lapses in oversight, such as steering borrowers with long-term financial hardship to forbearance – which temporarily suspends or reduced the payment but accuses interest, are not uncommon across the board, according to Ms. Yu.

Some of these problems simply stem from structural failures in the industry, Yu says.

Though the income-driven repayment plan could significantly help many low-income individuals by lowering monthly payment to as little as $0, it is “administratively challenging” to handle, Yu says. Since it considers the person’s income and family size, it requires much more paperwork.

“We think there's kind of a widespread problem of just steering into forbearances because frankly that's what's easier to do,” Yu says. “But it does have a significant downside for borrowers, especially if they could qualify for an affordable repayment plan instead.”

In addition, there's an incentive for the debt collectors who work for the Department that tends to hurt borrowers. The higher profits servicers receive from enrolling borrowers into rehabilitation motivates them to steer borrowers that way, says Yu, rather than direct them to other programs that will produce the same results, such as consolidation, a slightly faster process for the borrower.

Though some speculate there will be similar lawsuits in the field, Yu says Navient’s case underscores the importance of having a national proactive regulatory watchdog, and she hopes the case drives more compliance with the law.

The case "highlights the need for the bureau and its active and independent watchdog role,” she says. “This isn't just an incredibly challenging situation for the individual borrower. There needs to be an entity like the CFPB who's looking out for all of these different issues can arise. And especially when they happen on a systemic-level.”